Independent Investors

Over at the WSJ Opinion Journal, John Zogby writes that the emerging “investor class,” i.e., people with significant investments and investment income, is large — 46% of the population and growing. Zogby thinks this portends well for the Republican party because investors tend to vote Republican. I think Zogby is probably correct.

One neglected facet of the Social Security debate is how changing Social Security from a non-saving welfare program to a saving investment program will alter the relationship of the individual citizen to the State. Under the current system, an individual’s right to Social Security and his rate of return are wholly dependent upon political fiat. An individual gets only what the political class say he will get and only when they say he will get it. The individual becomes very dependent on the whims of the political elite.

How many elderly people have voted for socially liberal Democrats, not because they support the full set of the Democrats’ political agenda but only because they fear losing their Social Security benefits? How many deeply religious people must choose to vote for politicians who support abortion on demand, in order to get their retirement checks?

For the political class, creating dependence on the State is the first and best means of job security. I think that what opponents of privatization really fear is not that it will fail, but that it will succeed and thereby obviate the need for a political class to provide retirement security. If most people no longer have to kowtow to politicians in order to have a secure retirement, a wide swath of the political spectrum will lose a major justification for its existence. Individuals will be far more free to vote their consciences without fearing economic harm.

Throughout history, political classes have used fear to control the people. The current fear mongering over Social Security springs from the same totalitarian impulse as motivated those who rattled sabers in the past. It is time to move beyond fear and create programs that let individuals be financially secure but politically independent.

9 thoughts on “Independent Investors”

  1. Methodological issue: I wonder to what extent a person’s self-identification as an “investor” or not is a reflection of their political leanings. Consider two investors who have 401(k)s (of equal sizes) in the stock of them is a small business owner and the other is a college professor. Which is more likely to describe himself as an “investor?”

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  3. That very thought popped into my head as I read Zogby’s article. He apparently did not ask anyone to qualify their position of what an “investor class” was, only whether or not someone felt they belonged in that class.

    The college professor from your question, when trying to make himself fit into a box titled, “investor class” might lean away from that classification because of other circumstances surrounding his livelihood. He may only see his 401(k), or more likely his 403(b), in a different light than “investing.”

  4. I sincerely hope that the landing is soft as we slide down the back slope of peak oil. That could be disruptive for investments for quite a while if we have to make significant adjustments as a culture.

  5. What will these crazy investment advisors claim next?

    Published on 15 Mar 2005 by Salon.
    Running on empty
    by Robert Bryce

    Four years ago, the analysts at John S. Herold Inc. were the first to call bullshit on Enron. On Feb. 21, 2001, three Herold analysts issued a report that said Enron’s profit margins were shriveling, the company had too few hard assets, and its stock price was way too high. Less than ten months later, Enron filed for bankruptcy.

    Today, the analysts at Herold — a research-only firm that issues valuations on several hundred publicly traded energy companies — are making predictions even bolder than their call on Enron. They have begun estimating when each of the world’s biggest energy companies will peak in its ability to produce oil and gas. Herold’s work shows that the best minds in the energy industry are accepting the reality that the globe is reaching (or has already reached) the limit of its own ability to produce ever increasing amounts of oil.

    Many analysts have estimated when the earth will reach its peak oil production. Others have done estimates on when individual countries will hit their peaks. Herold is the first Wall Street firm to predict when specific energy companies will hit their peaks.

    Since last fall, Herold has done peak estimates on about two dozen oil companies. Herold believes that the French oil company, Total S.A., will reach its peak production in 2007. Herold expects 2008 to be critical, with Exxon Mobil Corp., ConocoPhillips Co., BP, Royal Dutch/Shell Group, and the Italian producer, Eni S.p.A., all hitting their peaks. In 2009, Herold expects ChevronTexaco Corp. to peak. In Herold’s view, each of the world’s seven largest publicly traded oil companies will begin seeing production declines within the next 48 months or so. …

  6. I wonder what price assumptions most oil companies are using in their hurdle-rate calculations for new E&P projects? About 6 months ago, I read that the typical long-term assumptions were in the $25-30/bbl range. Obviously, if companies are convinced that something in the $40s is sustainable, there will be a lot more exploration and drilling.

  7. They seem to be spending less on exploration:
    • On the other hand, exploration spending has fallen from over $11 billion in 1998 to around $8 billion in 2003 – a 27 percent decline. This can be attributed in part to the impact of the mega-mergers in the industry, which created “cost synergies” by cutting exploration budgets. In addition, the rise in development spending has put the squeeze on exploration budgets, as companies seek to achieve greater financial discipline.

    • The decline in exploration just happens to have coincided with a recent downturn in new discoveries. The average level of new discoveries from 2001 to 2003 was significantly lower than during the period 1997 to 2000.

    Wood Mackenzie sees “some evidence” that exploration expenditures may rise, but adds that reserve replacement through exploration will continue to prove a challenge.

    Avoiding risk and responsibility
    Don Stowers

    Don Stowers
    Oil & Gas
    Financial Journal

    Some people think the price will be stable at a high level:

    Manama: The era of cheap oil is gone forever, a Kuwaiti official said.

    “Prices will never [again] go under the $40 per barrel mark,” Hani Hussain, Kuwait Petroleum Corp’s chief executive, told Gulf News in an interview yesterday.
    Published on 13 Mar 2005 by Gulf News. Archived on 13 Mar 2005.

    Era of cheap oil over, says Kuwait official
    by Mohammad Almezel

    Other opinions out there of course.

  8. One investment adviser, Marshall Auerback, makes these observations regarding peak oil.

    “The View from the Summit of Hubbert’s Peak”

    “OPEC has reached its production limits. It doesn’t have much production capacity. If it came to a crunch, it has capacity for one million barrels (more per day), and I don’t think a production increase would influence the barrel price.” he told reporters last week. Depletion dynamics are, as the geologist M. King Hubbert predicted decades ago, alive and well.

    Production Capacity:
    The evidence, however, is becoming irrefutable and the IEA is finally sounding the alarm: “The reality is that oil consumption has caught up with installed crude and refining capacity,” the Paris-based agency said. “If supply continues to struggle to keep up, more policy attention may come to be directed at oil demand intensity in our economies and alternatives”. It states in its World Energy Outlook 2004 that $3 trillion will need to be invested in new oil production capacity to offset future production declines and meet demand growth to 2030.

    Last year’s increase of 2.65m barrels a day in global oil demand overshadowed the modest rise of 700,000 b/d in global refining capacity in 2004. U.S. refineries are working close to capacity, yet no new refinery has been constructed since 1976. And oil tankers are fully booked, but outdated ships are being decommissioned faster than new ones are being built

    The problem, as energy investment banker Matthew Simmons – long a smoke alarm for Peak Oil – has said repeatedly, “is that the world has no Plan B.” Simmons is absolutely correct. He further notes, “The world’s network of crude oil pipelines also is now operating at virtually 100% capacity. For almost all of 2004, the world’s tanker system operated at full capacity too. This sparked an unprecedented rise in taker rates, which added up to $5 to $6 per barrel to the wellhead price of oil in some key long-haul export routes.” Why are no more tankers being built? Because, as Simmons, Campbell, Groppe, Michael Ruppert and others in the “Peak Oil” camp have argued, soon there won’t be enough oil to ship to cover what it would cost to build them.

    The monkey in the wrench is that if we want to pursue economic growth rather than simple sustainability, then we have to find solutions to this relationship–
    The average American consumes 25 barrels of oil a year. In China, the average is about 1.3 barrels per year; in India, less than one. So as some 2.5 billion Chinese and Indians move to improve their living standards, their demand for energy is likely to become similarly insatiable with all that this implies for prices in the energy complex

    The other nutcracker to the demand side of the equation is that petroleum provides lots of other things for us from fertilizer to insulation for copper wires. A funny-or not-description of our predicament can be found in this essay:
    “The Long Fingers of Petroleum”

    Ironically, at least one western hemisphere nation has made the transition to sustainable agrarian post-industrial society: Cuba post-1991. They had one week’s notice. They’ve done a hell of a job.

  9. As an individual investor I am sick of seeing puff pieces on Martha Stewart. She had the connections that we “little guys” do not have.

    And, after a 5-month slap on the wrist, the media is galloping to offer her a free remake. Now she’s the “lady who cooked gourmet food for the inmates” rather than the conniving, privileged investor who got the inside word from Sam Waksal. “Sell now, and screw the little guy.”

    This media make-over makes me want to puke (sorry Ginny).

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